Discussion
It is important to consider that limited liability is not the only addition to this new form of business vehicle. Other fundamental differences lie between LLPs and the more traditional forms of business, some of which will benefit an LLP.
Taxation and the partnership relationship are the two common factors of LLP’s and partnerships, and are advantageous to both. On 7th March 2001 the Inland Revenue made the decision that LLPs will be considered general partnerships, for tax purposes. These arrangements confirmed that the LLP itself will not be liable for taxation on profits arising from the partnership but instead, the profits of individual members of the LLP will be assessed for taxation; a luxury that, of course, the Government can’t afford to offer to companies. The partnership relationship of both LLPs and the partnership gives the business a combined driving force for profit and with different partners bringing different knowledge, skill and experiences it can be a formidable force. However the business based on a partnership can be a fragile one, with the possibility of partnership feuds and disagreements bringing the business to a crashing end; just as a car being driven by more than one person is likely to run into trouble. So although the partnership relationship is likely to further the success of a business, it is still possible that such a relationship may be the downfall of a business. There is no legal obligation to create a written partnership agreement in both LLPs and partnerships, but it may prove to be a vital aid in any disputes that may arise between the partners. The written agreement requires no exact structure or content and is tailored to suit the partnership, so in many cases it only seems practical to include a written partnership agreement.
Other than similarities of the general partnership, LLPs hold certain characteristics that are common to fully-fledge companies. The LLP is body corporate, a legal entity in its own right with its own assets and liabilities that are separate from its members, this allows the benefit of limited liability for the members, should the LLP prove to be insolvent. The limited liability of the LLP was the main driving force behind its creation and is something that has always been unavailable to any form of partnership platform until April 2001. The limited liability of the LLP is much the same as that of companies, in that members can still be personally liable for his/her own negligence or his/her breach of duty. While other, blameless, members will not be liable for the negligence or breach of trust of another member. LLPs must also comply with much of the rules that govern companies, including registration of names and requirements for filling information, concerning annual accounts and annual returns, to the Companies House. This publication requirement is far more demanding than the position for general partnerships, and this can be time consuming and costly and although LLP’s are governed by its own statute and regulations, much of these are derived in principle from the Companies Act 1890.
Conduct any form of research in the late 1990’s and the desire for the flexibility of partnerships and the separate legal entity of companies, would reach convincing levels for the Government to convert such ideas into legal existence; and this was of course done on the 6th April 2001. Also the domino affect of US states adopting LLP availability, in the 1990’s, raised a few eyebrows across the Atlantic. So despite the demand and arguably the need for LLPs in the UK, why has it failed to revolutionise the format of businesses in the UK, as many had expected. The demand for LLP, in both the UK and US, came from top accountancy and law firms who were concerned by the lack of protection available to them in a field rigged with mines of malpractice claims. A US example of which is that of the partners of Laventhol & Horwath. The conversion to LLP, despite the familiarity of such in the US, has been relatively slow with few existing partnerships taking the step into the somewhat unknown. However it is happening, with UK’s top firms like Wragge & Co already converted and Scotland’s top firms paving the way to a conversion; Bill Drummond of Brodies, a top Scots law firm, confirmed the firm has registered an LLP, but is still undecided whether to make the final step, “We’ve done it to ensure the name is available to us should we decide to do so. The feeling in the legal industry is that LLP registration is going to increase, and we are seeing more firms in England going that way.” As well as the unknown factor, the conversion to a LLP can be slightly unnerving for those with much to lose. The conversion involves the registration of the LLP, which can be time consuming and expensive, and also the conversion can have tax implications. Crucially the UK LLP has a separate corporate personality distinct to its members, and while this has advantages of limited liability, there is also the problematic area of foreign jurisdictions viewing UK LLPs as an entirely body corporate and may treat UK LLPs, within their jurisdiction, as such and so be taxed accordingly. So the transition of a general partnership to a LLP may not be all that, with consideration to tax status beyond the British coast.
Conclusion
Although there seemed to be a substantial desire for the existence of the LLP in the UK, the actual demand for such has been somewhat reserved. In my view, firms are put off by the unknown factor, and “After you, Claude,” seems to be the prevailing stance by some firms. Once several firms commit to the LLP, the domino affect will take hold and spread northwards from London. Also the necessity of LLP’s is greater in the US than that of the closely connected UK. The American society seems to have a continuous flow of “deep-pocket” claims against firms big and small and thus American firms feel the urgent requirement for protection. Whereas the British environment seems to be one of stability and although claims are of course possible, I feel UK firms are more relaxed about the situation and feel little urgency to convert in a panic. This point is emphasised by Max Gliner “It is often argued vociferously that the UK system of corporate governance is in some way better than the American due to the value attached to principles rather than rules of good governance”. However it must be said, that I do feel the LLPs are the way forward and anyone left in the out-dated partnership in future years is likely to be isolated in an ox-bow lake like situation with the world of business meandering by.
Word Count – 1,489
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PAUL KA PINKERTON, 02004519. 01/12/2003 Page
“The empire collapsed in the weeks following his (Robert Maxwell) death in 1991, revealing a web of stock-lending, illegal borrowing….”. Connan H., “How Coopers lost the plot on Maxwell, but kept its heads”. The Observer, London: 7th Feburary 1999.
For more information see: http://www.guardian.co.uk/enron/story/0,11337,642978,00.html.
Limited Liability Partnership Act 2000, s10. (1), 118ZA.
The Limited Liability Partnerships Act 2000, The Limited Liability Partnerships (Scotland) Regulations 2001 and .
Along with the Insolvency Act 1986 and the Company Directors Disqualification Act 1986.
Partners of Laventhol & Horwarth were held personally liable for several large malpractice verdicts against the firm that were unpaid at the time of bankruptcy. Big Suits: In re Laventhol, AM. LAW. (Jan.-Feb. 1991), at 30.
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